Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
(a) Does the addition of a cash out option result in the disposition of rights under an existing stock option plan?
(b) Does the payment of the cash out amount by the employees employer rather than the foreign parent company in respect of which the stock options are issued constitute the conferral of a benefit by the Canadian employer on the foreign parent?
Position:
(a) The addition of the cash out right is not a fundamental change to the plan such that no disposition of rights occurs
(b) The payment described in the ruling does not constitute the conferral of a benefit.
Reasons:
(a) The agreement remains an agreement to issue shares such that section 7 continues to apply
(b) The expenses to be paid by the Canadian employer are cash payments to compensate its employees and thus in this situation the payment thereof could not be considered to constitute a benefit on the foreign parent.
XXXXXXXXXX 990259
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling - XXXXXXXXXX ("Employer")
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-referenced taxpayer.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows.
Relevant Facts
1. Employer is a "taxable Canadian corporation" as defined in the Income Tax Act (Canada) (the "Act"). Employer's head office is located at XXXXXXXXXX. Employer's corporation account number is XXXXXXXXXX. Employer is served by the XXXXXXXXXX Tax Services Office and files its tax return at the XXXXXXXXXX Tax Centre.
2. Employer is a direct wholly owned subsidiary of XXXXXXXXXX, which is a corporation incorporated and resident in XXXXXXXXXX.
3. Employer is an indirect wholly owned subsidiary of XXXXXXXXXX ("Foreign Parentco"). Foreign Parentco is a corporation incorporated and resident in XXXXXXXXXX. Through its subsidiaries, Foreign Parentco carries on business, inter alia, as a XXXXXXXXXX.
4. The shares in the capital of Foreign Parentco are not listed or traded on any stock exchange or organized over-the-counter market and, accordingly, there is generally no market for such shares.
5. At an Extraordinary Shareholders' Meeting of Foreign Parentco held on XXXXXXXXXX (the "Shareholders Meeting"), approval was given to the issuance of subscription rights ("Subscription Rights") to certain senior management employees of Foreign Parentco or of any companies under direct or indirect, exclusive or joint control of Foreign Parentco.
The purpose of the Subscription Rights Plan is to promote the interests of Foreign Parentco and its subsidiaries including Employer by providing incentive compensation to certain key officers, directors and employees.
6. The terms and conditions governing the granting of Subscription Rights (the "Subscription Rights Plan") are set out in a document entitled "XXXXXXXXXX". XXXXXXXXXX. To date, no regulations been issued pursuant to the Plan.
7. Each Subscription Right confers on the holder the right to acquire one newly issued ordinary share in the capital of Foreign Parentco (a "Foreign Parentco Share") at a specified exercise price which is equal to the fair market value of one Foreign Parentco Share at the time the Subscription Right is granted, as established in accordance with a detailed valuation formula (the "Formula") contained in the Subscription Rights Plan.
8. The Subscription Rights Plan is administered by a special committee (the "Special Committee") established by the board of directors of Foreign Parentco to identify senior management employees of Foreign Parentco and its subsidiaries to be granted Subscription Rights. The members of the Special Committee include senior officers and directors of subsidiaries of Foreign Parentco, including a representative of Employer.
9. The Special Committee may grant Subscription Rights in its sole discretion to those individuals identified by the Special Committee as likely to contribute significantly to the long-term value of Foreign Parentco.
10. The Subscription Rights are divided into three classes, being Class A Subscription Rights, Class B Subscription Rights and Class C Subscription Rights (which are collectively referred to herein as "Subscription Rights"). Except where otherwise specified herein, Subscription Rights of these three classes are identical.
11. The Special Committee is authorized to grant (a) Class A Subscription Rights from XXXXXXXXXX, (b) Class B Subscription Rights from XXXXXXXXXX, and (c) Class C Subscription Rights from XXXXXXXXXX.
12. Class A Subscription Rights are exercisable from XXXXXXXXXX, Class B Subscription Rights are exercisable from XXXXXXXXXX, and Class C Subscription Rights are exercisable from XXXXXXXXXX, except that Subscription Rights may only be exercised between XXXXXXXXXX in any particular year (other than XXXXXXXXXX, where Subscription Rights may only be exercised between XXXXXXXXXX). All unexercised Subscription Rights expire immediately after XXXXXXXXXX.
13. In order to exercise a Subscription Right, a holder must notify the president of the board of directors of Foreign Parentco in writing, and during a period when the Subscription Right is exercisable (an "exercise period"). The exercise price must be paid in cash by the holder to Foreign Parentco no later than the last day of the exercise period, and the corresponding Foreign Parentco Shares will be issued between XXXXXXXXXX of the year in which the exercise period falls.
14. Notwithstanding paragraph 12 above, a Subscription Right outstanding at any particular time will in general become immediately exercisable if more than 50% of the issued shares of Foreign Parentco are acquired by a person or group of persons who are not shareholders of Foreign Parentco at the time the Subscription Right is granted or in the event of the admission of any or all the shares of Foreign Parentco to official listing on a stock exchange.
15. The Subscription Rights are subject to certain anti-dilution provisions under which the exercise price, the exercise period and other terms and conditions thereof may be adjusted in certain situations.
16. The Subscription Rights Plan provides that when a Subscription Right is granted to an individual at any particular time:
(a) the individual must, at the same time, acquire a XXXXXXXXXX bond issued by Foreign Parentco (a "Foreign Parentco bond"), and
(b) the individual must enter into
(i) a put agreement with XXXXXXXXXX. ("Putcallco"), a corporation resident in the XXXXXXXXXX, under which the individual may cause Putcallco to acquire such individual's Foreign Parentco Shares at their fair market value at the time of such acquisition, such fair market value to be determined on the basis of the Formula (the "Put Agreement"), and
(ii) a call agreement with Putcallco under which the individual's Subscription Rights which are not yet exercisable may be acquired by Putcallco at their fair market value (determined in accordance with the Formula) in the event the individual ceases to be an employee of Foreign Parentco or any of its subsidiaries (the "Call Agreement").
The purpose of requiring holders of Subscription Rights to acquire Foreign Parentco bonds is to ensure that the terms of the Subscription Rights Plan are consistent with the normal practice and taxation laws of XXXXXXXXXX. It is normal for XXXXXXXXXX companies issuing stock options to simultaneously issue bonds.
The purpose of the Put Agreement described in clause 16(b)(i) above is solely to provide holders of Foreign Parentco Shares acquired on the exercise of Subscription Rights with a means to liquidate their holdings of Foreign Parentco Shares. The Foreign Parentco Shares are not listed or traded on any stock exchange or organized over-the-counter market, and accordingly, in the absence of the put right individuals may not wish to exercise their Subscription Rights, since the Foreign Parentco Shares acquired on such exercise would be illiquid.
The purpose of the Call Agreement described in clause 16(b)(ii) above is to provide a mechanism by which employees may monetize their Subscription Rights held at the time their employment ceases.
17. The Call Agreement does not in any way impede the exercise of Subscription Rights during the applicable exercise period. During such period, the employee has an unfettered right to exercise the applicable Subscription Rights without regard to the Call Agreement.
18. The Foreign Parentco bonds will generally be non-interest bearing, but will be issued at a discount from the principal amount payable at maturity. Except for the requirement that a holder of a Subscription Right acquire a Foreign Parentco bond, the bonds and the Subscription Rights are completely separate and independent instruments with separate and distinct terms. A holder may dispose of a Subscription Right without disposing of a Foreign Parentco bond. Furthermore, the exercise of a Subscription Right does not extinguish or alter in any manner the obligation of Foreign Parentco to repay the Foreign Parentco bond in accordance with its terms.
19. The requirement to acquire a Foreign Parentco bond at the same time a Subscription Right is granted to an individual as described in 16 above, (the "Requirement"), in no way affects the fair market value of a Foreign Parentco share or the exercise price under the Subscription Right to acquire a Foreign Parentco share. The fair market value of a Foreign Parentco share would be unchanged if the Requirement did not exist.
20. In XXXXXXXXXX, Foreign Parentco and Employer entered into an agreement (the "Reimbursement Agreement"), a copy of which you have included with your ruling request. The Reimbursement Agreement provides, inter alia as follows:
(a) Employer acknowledges that the Subscription Rights granted to employees of Employer constitute an important part of the compensation package offered to such employees, and
(b) Employer and Foreign Parentco agree that, at any time when a Subscription Right is exercised by an employee of Employer, Employer will be obliged to pay Foreign Parentco an amount equal to the amount, if any, by which the fair market value of the Foreign Parentco Share acquired by the employee at the time of such exercise (such fair market value to be determined using the Formula) exceeds the exercise price paid by the employee to Foreign Parentco pursuant to the terms of the Subscription Right.
The purpose of the Reimbursement Agreement is to formalize the arrangement between Foreign Parentco and Employer whereby the benefits conferred on Employer's employees under the Subscription Rights Plan are paid for by Employer. In the absence of the payments to be made by Employer to Foreign Parentco under the Reimbursement Agreement, Foreign Parentco would, in effect, bear a portion of the total cost of compensating Employer's employees. This would not be appropriate in view of the fact that Employer's employees render services to Employer and not to Foreign Parentco.
Proposed Transactions
21. Employer will grant to all of its employees who hold Subscription Rights the right (the "Cash Out Right") to surrender to Employer the holder's Subscription Right, at a time when the Subscription Right is exercisable, in exchange for a cash amount (the "Cash Amount") paid by Employer to the holder equal to the amount, if any, by which the fair market value of a Foreign Parentco Share at that time (such fair market value to be determined using the Formula) exceeds the exercise price payable under the Subscription Right. Where a holder exercises the Cash Out Right in respect of a Subscription Right, the Subscription Right will be surrendered by the holder to Employer in exchange for the Cash Amount, and the Subscription Right will thereupon be cancelled. No other changes will be made to the Subscription Rights Plan.
Purpose of the Proposed Transactions
22. The purpose of providing holders of Subscription Rights who are Employer's employees with the Cash Out Right is to provide such holders of Subscription Rights with a means to receive from their employer an amount equal to the economic value of their Subscription Rights in circumstances where it would have been their intention to dispose of any Foreign Parentco Shares acquired upon the exercise of their Subscription Rights. It is anticipated that the Cash Out Right will add to the liquidity of a holder of Subscription Rights, and accordingly the Cash Out Right will enhance the perceived value of the Subscription Rights Plan to Employer's employees. The Cash Out Right provides holders of Subscription Rights who are Employer's employees with an immediate right to receive cash, whereas, under the Subscription Rights Plan as it now stands, holders must first exercise their Subscription Rights, acquire Foreign Parentco shares, and then dispose of such shares to Putcallco pursuant to the Put Agreement described in clause 16(b)(i) above.
To the best of your knowledge and the knowledge of the taxpayers involved, none of the issues under consideration in this request for an advance income tax ruling:
(a) is in an earlier return filed by any of the taxpayers or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of any of the taxpayers or a related person;
(c) is under objection by any of the taxpayers or a related person;
(d) is before the courts in respect of any of the taxpayers or a related person; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate to any of the taxpayers or a related person.
Rulings Given
Provided that the statement of relevant facts, proposed transactions and purposes of the proposed transactions are correct and constitute a complete disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions above, we rule:
A. The addition of the Cash Out Right to an existing Subscription Right under the Subscription Rights Plan held by an employee of Employer will not result in the disposition of any rights under the existing Subscription Right by the employee for the purposes of paragraph 7(1)(b) of the Act or the inclusion of any amount in the income of the employee under subsection 5(1), paragraph 6(1)(a) or paragraph 7(1)(a) of the Act.
B. The Cash Out Right to be granted to holders of Subscription Rights who are Employer's employees will not constitute a "salary deferral arrangement" as defined in subsection 248(1) of the Act.
C. Where an employee of Employer exercises the Cash Out Right, and Employer pays the Cash Amount to the employee:
(a) the Cash Amount received by the employee in respect of the economic value of the Subscription Right exchanged for the cancellation of that Subscription Right under the Subscription Rights Plan will be included in computing the income of the employee in the taxation year in which the Cash Amount is received by the employee in accordance with paragraph 7(1)(b) of the Act; and
(b) assuming the conditions specified in subparagraphs 110(1)(d) are met with respect to the Foreign Parentco Shares and the Subscription Rights Plan, the employee may deduct 25 % of the Cash Amount in computing his or her taxable income for the taxation year in which the Cash Amount is received.
D. No benefit will be considered to have been conferred by Employer on Foreign Parentco under subsection 15(1) of the Act, if Part I thereof were applicable, by reason only of:
(a) Employer making a payment in respect of the Cash Amount to an employee XXXXXXXXXX who exercises the Cash Out Right, or
(b) the cancellation of a Subscription Right where the holder of the Subscription Right is an employee of Employer who exercises the Cash Out Right and is paid the Cash Amount by Employer,
and consequently no portion of any such amount paid or credited by Employer to an employee of Employer who exercises the Cash Out Right will be subject to tax under paragraph 214(3)(a) and subsection 212(2) of the Act.
E. Employer will be entitled to claim a deduction, subject to paragraph 18(l)(a) and section 67 of the Act, in computing its income from a business pursuant to subsection 9(1) of the Act equal to the amount paid in cash in respect of the Cash Amount to a holder of a Subscription Right that is an employee of Employer who exercises the Cash Out Right in respect of a Subscription Right, and whose Subscription Right is thereby cancelled.
The above rulings, which are based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada provided that the proposed transactions are completed within six months of the date of this letter.
Nothing in this ruling letter should be construed as implying that Revenue Canada has accepted that the Formula referred to in paragraph 7 under "Relevant Facts" above provides a reasonable estimate of the fair market value of a Foreign Parentco share at any particular time. This is a question of fact that is beyond the scope of this letter.
In addition, this letter does not express or imply and should not be construed as expressing or implying any ruling other than those specifically provided above.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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